Taking a harder look at possible gasoline price-gouging

ASK THIS | April 19, 2005

The research director of Public Citizen's Energy Program says the press is too quick to conclude that price increases are simply due to supply and demand. Reporters, he says, aren't asking the right questions.

Q. Are oil companies making part of their record profits off price gouging?

Q. Who exactly determines oil prices? And how can we make sure they're not pulling an Enron?

Q. Can anything be done to tamp down speculation in the short term?

As oil and gasoline prices continue their steady climb, lots of stories are written concluding that the increases are attributable to supply and demand, pure and simple, and that the only solutions –- increasing domestic supply or reducing domestic demand –- are long-term, so we're simply forced to deal with higher prices in the meantime. And OPEC gets branded as a primary culprit.

But that's not the whole story.

One of the first things to examine is the relationship between the record profits enjoyed by U.S. oil companies and the higher prices for consumers and American industry. For example, in 2004, ExxonMobil –- the product of the 1999 merger between Exxon and Mobil –- chalked up the world's biggest-ever profit for a single company: $25.3 billion.

Is it possible that ExxonMobil and other U.S. oil companies are making part of their profits off price gouging? It is possible that, just like Enron constricted supply in California by ordering power plants offline in order to create supply shortage to jack prices up, U.S. oil companies are keeping supplies offline and waiting to release those supplies until prices rise enough to make it worth their while?

The potential is there. According to the Energy Department, the U.S. is the 3rd largest producer of crude oil in the world (only Saudi Arabia and Russia produce more oil than we do), and we are far and away the largest consumer of oil, using 25 percent of the world's consumption every day. That makes the U.S the largest oil market in the world, and therefore actions in the U.S. help determine world oil prices.

The history is there. The U.S. Federal Trade Commission has in the past found that U.S. oil companies intentionally withheld supplies of gasoline from the market in order to drive prices up. In March 2001, the FTC concluded an investigation into a spike in Midwest gasoline prices and found that one firm chose not to sell its excess supply because that "would have pushed down prices and thereby reduced the profitability" of its exsiting sales. "An executive of this company made clear that he would rather sell less gasoline and earn a higher margin on each gallon sold than sell more gasoline and earn a lower margin." The FTC didn't find any violations of antitrust laws because there was no collusion. But, it concluded: "In each instance, the firms chose strategies they thought would maximize their profits."

And it's easier now than ever. The consumer group Public Citizen, first in a May 2001

reported that recent mergers in the U.S. oil industry have greatly consolidated control over refining and marketing in the U.S., making it easier for a smaller group of companies to price-gouge. Don't believe consumer groups? Perhaps you'll believe the U.S. Government Accountability Office, which affirmed Public Citizen's conclusions in a recent report to Congress.

The evidence is in the numbers. The domestic gasoline price spread –- the price of a gallon of gas, minus the cost of crude oil and taxes –- has increased by 30 percent from the mid-1990s to 2004. That spread measures the share of a gallon of gas charged by refiners and marketers. In the mid-to late-1990s, the domestic spread averaged 39 cents per gallon. But during the post-merger period from 2000-2004, the average domestic spread has been 51 cents. (See Fueling Profits, a report by Mark N. Cooper for the Consumer Federation.) This translates to an increase in U.S. gasoline prices of $55 billion, the amount by which U.S. consumers have been price-gouged. It is no coincidence that oil corporation profits are at record highs.

And just like Enron falsely tried to blame California's environmental laws for causing the 2000-2001 energy crisis, the oil industry is trying to do the same today for higher oil and gas prices. Hopefully we won't get fooled again.

Now consider the rising price of crude oil. Who exactly determines oil prices? It sure isn't OPEC. The international cartel isn't what it used to be, as 75 percent of America's oil comes from non-OPEC sources, and quarterly announcements by the group that it's raising crude oil production are sometimes met by price increases on the oil trading exchanges.

Today, prices are determined on international exchanges based on what traders are willing to pay. And who are these folks trading oil and setting the price? Increasingly, they are hedge funds, investment banks, and others out to make a quick buck speculating on the price of oil. And while they're making money, the rest of us are paying for it.

As Simon Romero wrote for the New York Times on March 15, 2005: "Even as oil prices flirt with record highs, a growing number of people in the energy industry, including the chairman of ExxonMobil, are voicing concern over whether the soaring oil prices are justified by supply-and-demand conditions in the market. Some are even comparing the trading in energy markets to the speculative frenzy in technology stocks in the late 1990's."

A recent U.S. Senate report ("U.S. Strategic Petroleum Reserve: Recent Policy Has Increased Costs to Consumers But Not Overall U.S. Energy Security," prepared by the minority staff of the Permanent Subcommittee on Investigations, March 5, 2003) concluded that the trading markets that set oil prices are severely underregulated, opening the door to Enron-style manipulation of crude oil markets.

In fact, there's a strong chance that such manipulation is occurring right now, but the government isn't even allowed to collect the information necessary to make such a determination.

In response to Enron's fraud, Congress enacted sweeping new government regulations over two issues: campaign finance and the accounting industry. But the heart of the scandal -- manipulating energy markets -- Congress and regulators left untouched.

And remember, it was Enron and then-Texas Senator Phill Gramm who provided the biggest push to pass the energy trading deregulation bill in the first place –- The Commodity Futures Modernization Act of 2000 (S. 2697, 106th Congress) passed during the lame duck session after the 2000 election.

The first step toward tamping down speculation would be to restore transparency to the speculative oil trading markets by re-regulating Over-the-Counter exchanges. In the past, amendments proposed by Senator Dianne Feinstein (D-Calif.) to do just that have failed. See the roll call votes for this proposed amendment in 2002, and this one in 2003.

Another useful step would be for the Department of Justice, the Federal Trade Commission and Congress to launch investigations into the ability of oil companies to utilize legal and illegal manipulation strategies to price-gouge consumers.

Tyson Slocum is the Research Director for Public Citizen's Energy Program.
E-mail: tslocum@citizen.org

OFT
Posted by
Bill Terry
04/09/2010, 11:20 PM
On a recent program I heard you say that oil companies should pay royalties on production from the OCS. Does that mean that you think they should pay more than the one eigth that they are already paying in royalties? How much do you think they should pay when they put forth all that hard work and risky investments? You obviously are not well informed about what it takes to succeed in a complexed industry that you like to criticise.